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The Return Of Secular Stagnation

November 8, 2011 11:08 amNovember 8, 2011 11:08 am

Steve Randy Waldman has a characteristically interesting post on interest rates. He starts from the observation that real rates are now negative — lenders are
actually willing to accept a negative yield on inflation-protected bonds:

He then argues that the”natural” real rate of interest — the interest rate that would match savings and investment at full employment — has been negative for quite a while, and that we’re
only seeing this now because various bubbles and deregulatory schemes have masked the reality.

What he doesn’t say, but immediately strikes anyone who knows some of the history here, is that this amounts to a return of the “secular stagnation” hypothesis that was popular in the early postwar
years; the hypothesis was that there was a fundamental excess of desired savings over desired investment, and that this would require government intervention on a sustained basis to achieve full employment.

That hypothesis proved wrong at the time, but that doesn’t mean it couldn’t be true now. And I’m somewhat sympathetic to the view that it might indeed be true.

Waldman goes on to suggest that high income inequality is what’s driving this — he has a little parable involving bakers and bread that ultimately comes down to the rich being satiated while the poor cannot
afford to buy.

OK, I like little parables. But I have a problem with this one, for one simple reason: any such story, basically an underconsumptionist story, would seem to depend on the notion that rising inequality has led to rising
savings. And you just don’t see that. Here’s private saving as a share of GDP:

Obviously it jumped up after the housing bust, but until then it was actually declining, and even now it’s below historic highs. I just don’t see how to make the underconsumption story work.

But then the question is, why do we find it so hard to achieve full employment even with saving somewhat low by historical standards. And the answer seems clear: it’s the trade deficit. America in the 70s and
80s could have high savings, not hugely strong investment, but still have full employment because trade deficits weren’t as large compared with the economy as they are now.

And this in turn means that the savings glut possibly making the natural real rate negative is actually originating abroad, not at home.